German investment in Ukraine

Germany is Ukraine’s No. 2 investor but cooperation remains below capacity due to difficult business climate

With a total of around seven billion euros and counting, Germany is currently the No. 2 international investor in independent Ukraine. The most important sectors of this economic cooperation are trade and finance, the car component industry, the construction materials industry, and logistics. Providing many thousands of jobs, German companies are a significant source of employment throughout the Ukrainian economy. Because of its advantageous location and proximity to the EU, Ukraine is a particularly interesting place for German companies to do business: business trips can be easily scheduled to last a single day if necessary, while short delivery routes make integration in cross-border production cycles easier. Entrepreneurs from the eastern part of Germany often enjoy a strong personal connection to the region and a familiarity with local business culture. In turn, industrial equipment from Germany enjoys a good reputation in Ukraine. However, despite this glowing initial overview it must be noted that in comparison to other locations in Eastern Europe the amount of German investment in Ukraine is still relatively low and has not lived up to the potential of the two countries’ bilateral economic relations. The reasons for this are well known: political instability, bureaucratic hurdles, legal uncertainties, and corruption are the main impediments to greater German investment just as their serve as barriers to the rest of the broader international community. German investors all too often complain of getting the impression that Ukraine loves the investments but not the investors.Medium-sized businesses account for one-third of all German foreign investment covered by investment guarantees. Entrepreneurs who are personally liable must be especially careful in weighing risks against rewards. Reliability thus plays a decisive role in their investment decisions. German investors and merchants are used to compliance with laws and regulations and also expect this when doing business in Ukraine. Medium-sized companies also come to the Ukrainian market expecting to find structures similar to ones they are familiar with from their own domestic or other regional markets. In Ukraine they quickly discover that many things considered self-evident elsewhere can prove difficult and time-consuming in a modern Ukrainian environment. A little patience and a pioneering spirit make things easier.
In this context, the German economy had high hopes for a new start after the last presidential elections in Ukraine. A more stable and predictable framework was expected. Furthermore, the current strong economic climate in Germany means that companies are again exploring opportunities in foreign markets. The interest of German companies in Ukraine has thus been increasing again. In theory this should mean that conditions for German investment in Ukraine are good, but unfortunately the recent rise in interest among German companies in attractive emerging markets such as Ukraine has not resulted in a significant increase in investments. Many have simply decided to wait and see. The reforms in economic policy undertaken so far in Kyiv have not yet persuaded them, because they still do not see a significant improvement in their daily contact with officials and business partners. Above all, the negative experiences of foreign companies in their dealings with the Ukrainian authorities, together with reports of corruption and attacks by corporate raiders, immensely damage the image of Ukraine as a place to invest.

EU Association Agreement could boost investor appeal
A clear signal from the political leadership creating more legal security and greater transparency would certainly be helpful. Being more in line with European standards would increase the willingness of German investors to take better advantage of the potential of the economic relations between Germany and Ukraine. The comprehensive and enhanced free-trade agreement which is currently being negotiated with the EU is thus an enormous opportunity for the Ukrainian economy and a fast track to greater international investment. Ukraine sees its opportunities above all in the field of agricultural exports, a sensitive area of the negotiations for the EU. Any future agreement would make importing industrial goods easier and subject Ukrainian companies to more competition, but in the medium term it will also lead to a closer adaptation of Ukrainian law to European standards and the introduction of reliable regulations familiar to European investors. This will promote investments into Ukraine in almost every sector of the economy. The question of financing, too, which is often complained about by Ukrainian entrepreneurs and business community leaders, would be much easier to resolve. A successful (transparent) bidding process for large state contracts or the realization of a prominent privatization project with foreign participation would also be a positive signal for German investors. Successes in the fight against corruption are a prerequisite for this. The Euro 2012 European Football Championships certainly sparked the interest of German investors but the subsequent lack of German involvement in major Euro 2012 projects is also illustrative of the opportunity cost of Ukraine’s often problematic approach to the issue of investor interests. A German-Ukrainian working group was initially formed in which German companies could present their proposals, but opaque procedures for awarding contracts and over-long approval protocol did not encourage German investments with a view getting directly involved in Ukraine’s Euro 2012 preparations. The German economy has much to offer in the energy sector as well, including the fields of energy efficiency and renewable energies. Ukrainian regulations such as the “green tariff” and duty-free imports of industrial equipment promoting energy efficiency are attractive, but there are still difficulties in the implementation.

Learning from the East German experience
One aspect of Germany’s modern historical progress makes entrepreneurs from the eastern part of Germany particularly strong potential partners: many of the transformational problems facing Ukraine today have also been faced by East Germany. In the municipal sector, for example, companies from the eastern part of Germany know the challenges raised by property rights or the fixing of prices and in these matters they can be active as consultants beyond their entrepreneurial interests.

The German government supports the strengthening of economic relations in many ways. Promoting foreign trade is the mission of the German Embassy and the Delegate of German Industry and Trade. The German Consulate General in Donetsk promotes economic relations throughout eastern Ukraine. German high-tech companies can partner in the modernization process of Ukraine’s heavy industry via Germany Trade and Invest, which is represented by a correspondent in Kyiv promoting investment by providing economic information about Ukraine and Germany, sometimes free of charge. Germany and Ukraine also work together closely in a High Level Group for economic issues. For years, the German government has been financing a group of economic advisors to the Ukrainian government. The Gesellschaft fur Internationale Zusammenarbeit (GIZ) is represented with an office in Kyiv and, among other things, carries out projects in the energy sector as well as promoting the economy and employment policy. KfW Entwicklungsbank (KfW development bank) is also represented in Kyiv within the framework of official bilateral cooperation. It works to promote the energy and financial sectors. The Committee on Eastern European Economic Relations of the Federation of German Industries also supports projects and partnerships in Ukraine. Meanwhile, at the inter-city level there is a strong and growing partnership between the Leipzig and Lviv chambers of commerce. All this adds depth and strength to the economic relations between Ukraine and Germany.